'Forget Entrepreneurs, Only Banks Can Create Wealth'

We must hope the banks become less sick and less mad, and realise that to save themselves they must save everyone, according to The Guardian, 2 June 2011

“Entrepreneurs don’t create wealth. Banks create wealth, only banks. If you wonder why politicians seem so powerless to “rein them in”, then wonder no more. It is for this simple reason: banks have a monopoly on wealth creation.

Banks, it is true, need entrepreneurs to provide the most dynamic links to the real economy in the real world. Banks could sit in front of computer screens creating electronic money all day and all night if they liked (and they do like. They did exactly this during the last “boom”). But without a solid outlet into transactional reality (such as an invention, or the discovery of a natural asset, or even, for a time, an unsolid one, such as a housing bubble), their electronic money is worthless, figures on a flickering screen, no more meaningful than if you or I opened a text file, typed in some gargantuan number, shoved a pound-sign in front of it, and said: “This is mine.” The velveteen rabbit, in the eponymous children’s story by Margery Williams, needs love to make it “real”. In a similar sort of way, the banks need borrowers to make their money “real”.

They seem untouchable, because they are. At present, the very weakness of the banks makes them untouchable, just as in the recent past they were protected by their strength. The banks are sick, mad despots, corrupted by the easy, unsound money of recent decades. But all we can really do is wait, hoping that they become less sick and less mad, and come to the realisation that to save themselves they must save everyone. Not just the glamorous entrepreneurs.

Of course, the headline is very tongue-in-cheek. The reality is that banks do not create any wealth. What banks do create is money – the numbers in your bank account – and they create it through the accounting process they use when they make loans.

But money can facilitate wealth creation, if it’s used for the right reasons. When banks pump money into speculation and property bubbles, that contributes nothing to the economy. If they were to direct the money they created at small businesses and the real economy, we might see some recovery in the economy.

What is interesting and encouraging, however, is that an article like this appeared in the Guardian newspaper.

But we do not want to sit and “wait, hoping that the banks become less sick and less mad”. Actually, under the present system, there is no way, how the banks could become “less sick and less mad”. By contrast, the system is designed so that they have to become “more sick and more mad”, otherwise the system will collapse.

The reality is – our economy needs more debt to sustain growth and prevent a depression. Take away the debt and there is nothing because almost all of our money supply is created through debt. No debt, no money. If our economy wants more money, we need to create more debt. More debt means more interest to be repaid. More interest to be repaid means less purchasing power. Less purchasing power means more debt to survive and so on and the cycle continues…

We do not want to sit and wait, as there is really nothing good to wait for. We would rather change the system.

Have a look at our proposals to see what real reform would look like.